- The collapse of Terra’s LUNA caused investors to prefer liquid assets to illiquid, resulting in an 80% drop in liquid Ethereum in a pool on Curve Finance.
- stETH, the tokenized form of staked Ethereum, witnessed an explosive increase in selling pressure and suffered decoupling.
- Institutions like Celsius and Three Arrows Capital were caught in the crossfire as the price of Ethereum continued to plummet.
Ethereum price continued its fall in this week’s bloodbath. Experts argue that the decoupling of stETH from Lido Finance from Ethereum has triggered a crisis and institutions like Celsius and 3AC witnessed massive liquidations.
Also read: Three Arrows Capital Reportedly Facing Insolvency, Crypto Bubble Bursting
What is stETH?
lido financea DeFi platform that is one of the largest staking service providers for Ethereum, offers a tokenized form of staked Ether, known as stETH. Decentralized staking service provider promises that stETH is backed by Ethereum 1:1.
Once Ethereum completes its transition from proof-of-work to proof-of-stake consensus mechanism, a steth will be redeemable for an ether on the Beacon chain. The merger was scheduled for August 2022, according to Vitalik Buterin and Tim Beiko, however it is likely that a delay could postpone the event until the fourth quarter of 2022.
Therefore, stETH withdrawals are only possible after the Capella fork, an event scheduled to occur six months after the merger, which means Q2 2023 or later.
Why did Celsius and Three Arrows Capital trade stETH for ETH?
It is possible to trade stETH for Ethereum on the open market, as the pair historically trades close to 1:1, parity. However, with the volatility of demand, stETH price has crashed below Ethereum this week and a few times in the past.
The crash of LUNA de Terra played a crucial role in the stETH degree and increased selling pressure on the token. When LUNA/UST imploded, investors rushed into liquid assets, dropping illiquid ones in the process. there was an 80% reduction in liquid Ethereum in the Curve Finance stETH:ETH pool. Institutions faced massive liquidation of their positions on exchanges and there was a large-scale sale of stETH to cover margin requirements.
stETH:ETH price ratio plummets
Celsius Network and Capital of the Three Arrows were among the projects that stepped up their stETH sale and caused a sharp drop in the token’s price. This is known as a “depend” since stETH started discount trading for Ethereum on the open market.
How could the stETH depeg push borrowers into insolvency?
stETH is an illiquid asset that it has value as long as there are buyers for it. Once all the Ethereum is used up and the buyers disappear, there is no one to sell stETH to, making it a technically worthless token at the time.
What’s more, you warranty shrinks with a drop in the price of Ethereum. stETH is primarily used as a leverage tool, therefore an investor can take out a loan where they stake their ETH and hold stETH. Nevertheless, once the price of Ethereum decreasesthe value of your collateral is reduced, they panic and sell STETH on the open market, triggering more depeg.
Borrowers have difficulty paying lenders when they hold illiquid assets such as stETHif the sale persists and the buyers of the token disappear.
@hodlKRYPTONITE, a pseudonymous analyst has shed light on how lenders like Celsius collapse as a result of counterparty risk.
12/x Ultimately, the panic sell-off in stETH will lead to the sell-off in ETH and drag down the broader crypto complex. We already have macro headwinds, these structural sales flows will exacerbate the crisis. In my opinion, we will see a repeat of March 2020.
— degeneration (@hodlKRYPTONITE) June 11, 2022
The liquidity crisis is a slippery slope
@hodlKRYPTONITE explains that lenders like Celsius, when faced with collapse, trigger a contagion in the ecosystem. the complicated network of transactionswhere Ethereum is staked on stETH and stETH is used as a leverage tool, credit is reduced.
A fall in the price of the liquid asset could result in a considerable contraction of deployed capital, loans must be repaid, and assets are sold for USD or stablecoins.
13/x: When lenders like Celsius collapse, they trigger contagion in the ecosystem as they have a complicated web of transactions with other players. Counterparty risk becomes real. Credit shrinks: loans must be paid off and assets must be sold for dollars.
— degeneration (@hodlKRYPTONITE) June 11, 2022
Analysts predict a trend change in the price of Etheruem
FXStreet analysts have assessed the price trend of Ethereum and argue that buyers are acquiring the asset at discounted prices. If the buying continues, the price of Ethereum could cross the hurdle at $1,270 and recover to $1,730.
ETH-USD price chart
Bitcoin could bottom at this level
FXStreet analysts have identified the level at which the price of Bitcoin could bottom. As the asset recovers from the recent drop, investors are resuming purchases. For more information, watch this video: